Scientific Beta

The Scientific Beta Factor Analytics Services (SB FAS) portfolio analysis tool lets investors take advantage of cutting-edge portfolio analysis. It capitalises on the latest academic research to deliver deep insights into an investor’s portfolio. SB FAS is superior to many existing factor analytics tools for two reasons. First, it provides investors with precise factor exposure measurements by using regression betas instead of stock characteristics such as factor scores. Second, it employs a unique robustness analytics toolset that enables investors to examine strategies thoroughly with respect to six dimensions of robustness. 

Scientific Beta Factor Analytics Services (SB FAS) is a new, innovative service offered to asset owners seeking to improve the factor diversification of their equity allocation.

Taking the Existing Allocation into Account

SB FAS is part of a new factor investing process which, instead of ignoring the existing portfolio investments and considering each new investment as a standalone, offers a completeness or portfolio overlay approach. Before investing with or even replacing a manager, investors can check their existing factor exposures and evaluate whether they are obtaining a proper reward for their capital in line with the risks taken. They can analyse the current composition of their equity portfolio and drill down to each invested sub-portfolio or mandate if required.

As a complement to the performance and risk analysis and the factor exposure analysis, SB FAS also offers an analysis of the robustness of the investor’s current portfolio. This robustness analysis ensures that the performance and risk measured on historical track records that are often limited have the best chance of being reproduced out of sample, and it relies on an original analysis methodology that Scientific Beta uses to evaluate its own indices. Using several quantitative analysis advances, it takes factors and sectors regimes into account as well as the market.

Measuring portfolios’ factor exposures is the best way to evaluate the variations and differences in performance over the long run. Consequently, Scientific Beta uses a state-of-the-art academic approach to measure factor betas and analyse the quality of the portfolios’ factor diversification. Unlike what is offered by many market tools, this analysis is based on factor betas and not scores. It thereby avoids the shortcomings of score-based analyses that do not take account of the interaction between the factors and the differences in distribution of factor intensity.

Constructing a Factor Diversification Solution

After analysing their current portfolio, investors can utilise the SB FAS tool’s completeness optimisation which moves the current portfolio towards a diversification objective (i.e. a target portfolio). This target portfolio is a simulation of a factor diversified portfolio that integrates the long-term decorrelation between factors and takes advantage of their long-term reward. It is essentially invested in factors in equal proportions and benefits from strong factor intensity and factor deconcentration. It enables investors to compare the exposures of their portfolios to factors and consequently improve their factor diversification.

Given the factor diversification objective, an investor is then able to define turnover constraints for their existing portfolio and constraints that are specific to their completeness portfolio, which will ultimately allow them to move closer to the ideal/target portfolio diversification. By taking account of existing investments as well as new investment constraints and capabilities, SB FAS aims to simulate the optimal completeness portfolio. There are two ways to achieve this. One is to use long-only, single factor indices as completeness ingredients, while the other is to use long/short single factor indices as an overlay. The tool will propose weights for the single factor indices, such that it reduces the distance between the ideal diversification solution (target portfolio) and the existing portfolio.

An Approach that Allows Active and Passive Investments to be Combined

Over a given period, an active manager’s portfolio can produce very good or very bad performance without the manager necessarily being responsible for this performance. As many academic and empirical studies have shown, most of a portfolio’s performance depends on its factor exposures regardless of whether it is passively or actively invested. SB FAS allows factor exposures of the existing active and passive investment portfolios to be measured in the best conditions possible. Using this measurement and the assessment of the quality of this factor diversification, an investor can improve this diversification by completing their existing allocation with a completeness portfolio constructed using single factor indices. By taking account of the portfolio’s existing equity investments, whether involving active or passive investment, SB FAS enables investors to improve the risk-adjusted performance of their equity allocation in a robust way over the long run without necessarily calling into question all of the current allocation choices in favour of a single, standalone solution. Investors can divest in a selective way according to a measure of the existing value added and investment costs in order to reinvest in just as selective a way, according to the contribution of new factor solutions to the overall diversification of the investor’s equity investments.